Monti seeks to calm 'over-dramatised' market reaction

Italian Prime Minister Mario Monti has sought to calm markets after his
resignation plans sent European stocks downward on Monday, insisting there
will be no power vacuum in Italy ahead of an election.

Mr Monti announced that he would resign early after Silvio Berlusconi's party withdrew crucial support in parliament.Photo: AFP PHOTO / GEORGES GOBETGEORGES GOBET/AFP/Getty Images

His comments came at the end of a jittery day for investors, which saw the FTSE MIB in Milan plunge as much as 3.79pc, and the IBEX in Madrid fall 2.26pc- although both clawed back some losses by the close of trading, when the Italian and Spanish indices posted falls of 2.2pc and 0.73pc respectively.

Italian borrowing costs also rose by almost 0.3 percentage points.

Mr Monti said: "I understand market reactions, they need not be dramatised. I am very confident that the Italian elections, when they come, will give room to whatever coalition. The government will be, in my view, a highly responsible one."

He also quashed growing speculation he was mulling the possibility of standing for election early next year, saying: "I'm not considering this particular issue at this stage. All my efforts are being devoted to the completion of the remaining time of the current government."

The unelected technocrat prime minister announced he intended to resign as soon as crucial budget legislation was approved, following a turbulent week when Silvio Berlusconi's People of Freedom (PdL) party withdrew its support from Mr Monti's technocratic government.

Mr Monti, who was installed to rebuild the Italian economy a year ago, announced resignation plans on Saturday evening, just hours after former prime minister Silvio Berlusconi said he would run for a fourth term in the upcoming election.

An official statement released by the president's office said the prime minister had told the head of state that without the support of Mr Berlusconi's party, "he cannot further carry out his mandate, and consequently made clear his intention to resign".

While European politicians and officials tried to ease fears over the Italian economy, with the German finance ministry saying it did not expect the resignation to destabilise the eurozone, analysts took a dimmer view.

Nicholas Spiro at Spiro Sovereign Strategy described Mr Berlusconi as the "bogeyman of investors".

"Mr Berlusconi is not the cause of Italy's deep-seated and long-standing economic problems, but he epitomises the dysfunctional nature of Italian politics, with its discredited leaders and unstable governments," he said.

Gavin Nolan, director of credit research at Markit, warned that more volatility can be expected in the weeks running up to the election.

Italians will vote in the middle of a severe economic crisis, with a recession that began mid-way through last year showing no signs of abating, a massive public debt and unemployment at 11.1pc, a record high.

With the support of a cross-party alliance, Mr Monti imposed tax rises and spending cuts to bring borrowing costs under control and undertook a series of reforms to improve the competitiveness of the economy.

But Mr Berlusconi said on Wednesday that the former economics professor's austerity policies had left Italy facing a "recessive spiral without end".